P148 DIVIDEND CONSTRAINTS A firm has $800,000 in paid-in capital, retained earnings of $40,000 (including the current years earnings), and 25,000 shares of common stock outstanding. In the current year, it has $29,000 of earnings. Show Calculations:

1. What is the most the firm can pay in cash dividends to each common stockholder? (Assume that legal capital includes all paid-in capital.)

2. How would an $0.80/share dividend affect the firms balance sheet?

3. If the firm cannot raise new external funds, what do you consider the key constraint with respect to the magnitude of the firms dividend payments? Why?